How to apply for the refund of VAT or compensate the paid VAT?

If you have read our previous post “When do we apply VAT to a purchase of urbanised land“, you will know that we are buying a plot of land that is urbanised or in the process of being urbanised, for which we will be paying VAT at 21 %. Assuming for example that the price of the land is one million euros and we are paying 210,000 euros for VAT in December 2016. After the purchase of the land, we will be developing a promotion of 10 properties on this land.

It is important to bear in mind that when you buy a property with VAT, whether land, a house/apartment or a business premises, it will also be subject to Transfer Tax and Stamp Duty (from now on referred to as TT-SD), in its modality of Stamp Duty. You are then obliged to pay a percentage, which since 23rd of June 2012 is 1.5 % in the Region of Andalusia, and it cannot be offset with VAT, so this tax is considered as an expense or an increase of the value of the land.

With the purchase of a plot of land that is urbanised or in the process of being urbanised, and being subject to and not exempt from VAT, there is no possibility of asking for the waiver or exemption of article 20. One 20 of the VAT Act, which is why it is important to study how to best take advantage of the VAT paid:

The property has to purchased as an entrepreneur or directly as a company, for example as a limited liability company, which at first sight could be ideal, as we are going to develop a property complex, which will entail having to keep accounting records, make tax returns and of course cover our responsibility for both the construction and the future sale of the properties.

The possibilities differences in accounting and taxation.

For the company buying the land in our example, we would have the following possibilities if buying with VAT or TT-ST in the modality of Taxable Property Transfers:

In first place, the VAT of the company buying the urbanised land could either be offset when the properties are sold once the construction work has finished, or the company could ask for the refund of the previously paid VAT before the sale.

The refund of the VAT paid in December 2016 to the seller can be claimed in January 2017, provided that the public purchase deeds are dated in 2016. For these cases is best to wait until the end of the year to purchase the land, because if we buy, for example, in December 2016 then we can ask for the refund in January 2017 (only one month later), but if we buy, for example, in April 2016, then we would have to wait until January of the following year (10 months later), to ask for the refund (unless we are a company included in the REDEME, which is not usual in these cases).

The application for the refund of VAT could take approximately 6 months, counted from the 31st of January 2017 (deadline to present the VAT returns for the fourth quarter of 2016), and it would almost certainly lead to a Taxinspection as it is possible that the Tax Authorities would want to check that the company has the right to receive the VAT refund, specially as the amounts involved are considerable, such as the 210,000 euros in our example.

When will we have the right to receive the VAT refund?

We usually think this will come automatically, that we are entitled to it for the mere fact of buying and having paid VAT, but nothing could be further from reality. Clearly we will have to comply with current legislation to obtain the right to deduct the VAT paid and in this case the refund of the tax, specifically in articles 92 and following of the VAT Act.

In practice, we can resume these articles saying that we will have the right to receive this refund if we prove that the intention of the construction is to sell the properties built on the land so we pay input VAT during the construction.

It works this way because we must abide by the principles of the relationship between income and expenses, which means that if we are not going to receive income with VAT then the VAT paid with the expenses will not be deductible, and in the case of building property, the only income with VAT that we can receive is at the time of sale or with the rental of the property as an office.

Therefore we have to demonstrate that our future intention is to sell the properties But please note! We are talking about demonstrating a future intention, this is not easy when just a short time has passed between the purchase of the property and the VAT refund application, as it is not the same to buy a piece of land to build one single house as it is to build 10 apartments. In the first case the Tax inspector could think that we are building the property for the developer´s (the owner) own use, as in the second case, if we are going to build ten apartments it would be very difficult for the Tax Inspector to argue that we are going to build all ten apartments for the developer´s own use, as this option would be simply impossible.

There is also the possibility of waiting until construction is finished, or until we have sold at least one of the properties, at which point we would have received a reservation under the contract for a future sale, and in that way we will be declaring an income in our next tax return, and we will be clearly proving the intended future of the properties, which will be to sell them.

In the case of paying TT-ST for the land in the modality of Taxable Property Transfers, which would happen if the seller is an individual not acting as an entrepreneur, in which case the buyer will not be able to offset the Transfer Tax with the VAT which will be charged for selling the property once finished. The only benefit that we will obtain by buying with Transfer Tax will be that the percentage to pay will be lower (in Andalusia it is 8, 9 or 10 % of the price) against 21 % of VAT.

Regarding the accounts: As we cannot offset the Property Transfer Tax with the VAT we will be receiving at the time of the sale, the best option will be to record the tax as an increased value of the purchase of the land, this way we will increase the acquisition price and reduce the profit at the time of the sale of the property, in this way reducing the Corporation Tax to be paid, which at the moment is 25 and 28 % in Spain.

In our example, there could be the drawback that there is no transfer of properties after finishing the construction, in which case the only option we have is to rent out the properties with VAT in order to demonstrate that we have received income with VAT and this way we are not evading tax by receiving the VAT refund or in order to offset the VAT that we are now receiving from the rental income against the expenses with VAT we have paid during the building work.

If the reason why we are not selling the properties is that nobody wants to buy, then it will be enough to prove our intention of selling, (advertisements, contracts with Estate Agencies, etc), but if the reason is that we want to keep them for the developer’s own use, then Hacienda will be able to charge us for what we call “own use”.

If in the end, the developer (owner of the land) decides to keep one of the properties for his own use, then Hacienda will understand that this is a case of “own use”, in which case Hacienda can either apply a VAT settlement as if the property were being sold, in such a way that the company would be acting as the seller of the property and the owner would be buying it, charging the VAT at that moment, and asking for it to be paid in. Or Hacienda could also apply the articles we have mentioned above for the right of deducting the amounts of VAT paid, and holding that the amounts paid for VAT corresponding to the property which has been declared as for “own use” will not be deductible, and we will have to pay the difference that has been offset or the refund received, as well as any additional interest and this would also expose us to a disciplinary procedure.

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Jesús R. Ballesteros

Jesús is Economist and Lawyer. He studied “Licenciatura de Economía´´ (Bussines and Financial Degree) at the University of Navarra, and is “Máster en Tributación´´ (Master Degree in Taxation) by Garrigues (Multinational Company of Legal Services), where he started to work at their office in Granada. After this, he worked for two well-known multinational companies, while he studied “Derecho´´ (Legal Degree) in Madrid until he finally opened Ruiz Ballesteros Lawyers and Tax Advisors at the beginning of 2006.
Jesús is a frequent collaborator of Radio Intereconomía at their program “Foro Fiscal´´, this program is based on tax advisement, Cadena Ser and Ondacero.
He wrote a Thesis at the University of Granada which he then defended before the correspondent court, obtaining the DEA in Financial and Tax Law. The title of his Thesis: “Intercambio internacional de información tributaria y Paraísos Fiscales´´ (International tax information exchange and Tax Heavens), this makes clear that he is one of the few that have delved into this aspect of the law, and this makes it easier for him to deal with all issues related to international taxation.
He is the author of the book “ Como rentabilizar tu declaración de la renta´´ (how to render your annual personal income-tax) and he is the ideologist and developer of the first legal App in Spain. Paxtum, where you can download models of all kind of legal documents.
Professor of the “Instituto Superior del Derecho y Economía´´ (Institute of Law and Economics) (ISDE), in the areas of Commercial Law and Tax and Financial Law, he is co-author of their theoretical books in both areas as well as their book of “practical cases” in Financial and Tax Law.
He is an expert in the Spanish taxation system, international taxation, and corporate-commercial law. He speaks English and is the Founder and Director of our company. Ruiz Ballesteros Lawyers and Tax Advisors.